New World Development (0017): The curious case of 11 SKIES; earnings turnaround but unimproved leverage

After 3 years of net losses, FY26 core net profit turned mildly positive (even after perps, but excluding impairment). Investors' focus is on the early termination of 11 SKIES (though not a total surprise). The early termination represents a removed overhang, as the HK$2.3bn termination fee will release NWD's obligation to pay the HK$1.8bn guaranteed annual rent (or HK$72bn across the 40-year lease). CTFE (the controlling shareholder of NWD) also granted an option to HKAA to acquire 750M shares of NWD (~30% stake) at HK$2.25bn (implying HK$3/share) from CTFE, with the pre-requisite that CTFE will continue to hold a >30% stake in NWD (currently 45%); since the terms require HKAA to exercise all option shares at once, this implies that a rights issuance or capital injection from CTFE is possible. Most negatives are behind us and NWD is on track for a mildly positive net profit over the next few years. However, downside risks include (1) share dilution;